How Would a Minimum-Wage Increase Affect the Economy?

Besides universal preschool, the most overtly progressive policy proposed by President Obama last night was a large minimum-wage hike, from the current rate of $7.25 per hour—instituted in 2009—to a new rate of $9 per hour. Not only is this higher than the minimum wage in every state other than Washington, but when adjusted for inflation, it’s the highest minimum wage since 1981.

As is true whenever politicians propose a minimum-wage hike, there is concern over the effect on business and hiring. The traditional line—pushed by Republicans and business groups—is that an increase will cost jobs and harm small businesses. But if two decades of research are any indication, the actual effects of a minimum-wage hike are minimal and in some cases, positive.

In 1992, economists Alan Krueger (now co-chair of Obama’s Council of Economic Advisors) and David Card took advantage of a natural experiment—New Jersey increased its minimum wage by 18.8 percent, while neighboring Pennsylvania remained at its then-minimum of $4.25 an hour—to see what effect a minimum wage increase would have on employment. In short, they found that employment increased in New Jersey. Subsequent studies found mixed results. In one, raising the minimum wage resulted in a negative—but statistically insignificant—decrease in employment, while others found a small positive result, and still others found no relationship at all.

In all likelihood, the truth of the matter lies somewhere in the nexus of these results. In some areas of the country and in some industries, a minimum wage hike will cost jobs. In others, it won’t. You could point to the 2009 minimum wage increase as evidence that it harms job, but that would be dishonest in the extreme—the economy was already in free fall when that increase took effect.

It should be said that, as far as poverty fighting goes, the minimum wage isn’t a great tool. Even at $9 an hour, the minimum wage places families below the poverty line—and that’s if they’re working full time. They’ll have more cash in their hands, yes, but they’ll still need federal benefits—Medicaid, housing assistance—to make ends meet.

Much better, as Dylan Matthews points out for The Washington Post, is the Earned Income Tax Credit:

According to a 2007 study by the CBO, an increase in the minimum wage to $7.25, like that eventually passed that year, would increase wages by $11 billion, of which $1.6 billion went to poor families. By contrast, increasing the Earned Income Tax Credit for large families (as happened in the stimulus bill) and for single people would cost $2.4 billion, of which $1.4 billion would go to poor families. The EITC option costs one fifth as much to society but does about as much good for poor families.

As with the minimum wage, however, expanding the EITC requires congressional action, and as I noted in my column this morning, the odds for that are incredibly low. Republicans have committed themselves to obstruction, to say nothing of their ideological opposition to higher spending (the EITC) and greater burdens on business (a higher minimum wage).

I would love to be proven wrong—either policy would benefit low-income people and help the economy—but I’m not holding my breath.